Looking Back on 2016: Our Favorite Insights

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More than Meets the Eye in a Potential Bayer-Monsanto

After months of Monsanto Co. assessing M&A potential in the agri-chemical sector, German chemical giant Bayer flipped the script in May and made a $62 billion offer for Monsanto. Since we published our insight, Monsanto ultimately accepted Bayer’s impressive $66 billion cash offer in September—the largest deal of its type on record. Both companies’ shareholders have also recently approved the transaction, setting up the deal for final regulatory approval.

However, the United States elected Donald Trump to the presidency this November. He has explicitly promised to block both AT&T’s purchase of Time Warner and Comcast Corp’s NBC Universal acquisition. As a result, the deal’s likelihood is now back in question. Although President-elect Trump will not be able to directly block the deal under antitrust law, many of his appointees will have considerable influence in the process. As such, we will be closely watching both the President and the deal in the coming months, as Bayer and Monsanto executives work toward a late 2017 closing date.

Prime Minister Modi and India’s Agricultural Conundrum

Although India’s drought lasted well into 2016, June finally brought rain to the parched subcontinent. Experts forecast that the year’s overall rainfall will be roughly in line with the long-term average. Up to one quarter of the country’s population, or 330 million people, was affected by the drought, forcing large groups of rural Indians into cities seeking food and water.

The rains, however, were not enough to wash away Prime Minister Modi’s ongoing political issues. Last month, the Modi Administration scrapped the country’s two largest bank notes in an attempt to fight systemic graft and tax evasion. The controversial demonetization decision, in conjunction with the recent drought, will likely accelerate the rapid urbanization of India. We will be paying close attention to any structural changes in the country’s agriculture sector next year.

Russian Wheat: Red Breadbasket Rising?

Since we published our article on the topic in August, Russia’s growing export clout has received extra attention in the press. Russia has not been able to gain lasting market share in any notable wheat import market due to lower than average protein content levels in their bumper wheat crop. But recently the price competitiveness of Russian wheat has clearly swung global share in its direction. Russia boosted wheat production by about 18% this year after a record-warm winter and spring rains increased yields. The USDA currently projects that Russia's yearly exports will total 29 million tonnes to the US’s 26 million and the EU’s 25 million. Looking forward, we will be watching the condition of the country’s winter wheat crop as another bumper crop could help consolidate Russia’s recent market gains.

The Coming Demographic Challenges in Agriculture

As farmland and equipment prices keep increasing, new farmers are still experiencing difficulties in funding initial startup costs. The barriers to entry are too high for young, less well-capitalized farmers. Furthermore, as life expectancy climbs and mechanization reduces the amount of physical labor required, old farmers are able to work longer without retiring.

In the United States especially, the 2012 Ag Census revealed that the average US farmer is now 58.3 years old. This continues a 30-year trend of record highs. We will be paying close attention to the country’s next Ag Census in 2017 to judge the success or failure of the USDA’s recent youth-oriented lending initiatives.

The Future of American Ethanol: Bye, Bye, Biofuels? 

As we reported earlier this year, even some environmentalists have started to rethink support for the United States’ Renewable Fuel Standard (RFS) as the alleged environmental benefits of making corn into ethanol have come into question. The election of Donald Trump as US President has done little to clarify the future of the RFS. While on the campaign trail in Iowa earlier this year, President Trump came out in favor of the standard. But since the election, Trump has chosen Scott Pruitt, a vocal RFS opponent, as EPA chief.

Regardless of the Trump Administration’s final position, we note that the EPA has already announced another six percent increase in the renewable fuel standard for 2017. Recently, USDA Secretary Tom Vilsack predicted, “There’s going to be a lot of saber-rattling, but it supports too many jobs and too much rural infrastructure is set up for it.” What we will be watching more closely in the short term, therefore, is whether a Trump Administration will do away with the trading of Renewable Identification Number (RIN’s), the sharable credits that are used by the EPA to track fuel producer’s compliance with the RFS.

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